by Julie Martin
Officials representing 68 nations on June 7 signed a multilateral instrument to amend their existing tax treaties, adding provisions designed to curtail multinational tax avoidance and strengthen tax dispute resolution procedures.
The Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), signed during a ceremony in Paris, will allow counties to swiftly incorporate tax treaty related changes recommended in the OECD/G20 base erosion profit shifting project (BEPS) into their existing tax treaties.
The OECD today also released on its website the MLI signatories’ notifications regarding which tax treaties they would like covered by the MLI, as well as their reservations, options, and elections regarding those treaties. More than 1,100 tax treaties would be affected.
The MLI is historic as it is the first multilateral tax treaty ever signed that will amend existing bilateral tax treaties. Signing is just the first step, though. The convention now needs to be ratified by each country in accordance with the country’s normal ratification process.
Pascal Saint-Amans, Director of the Center for Tax Policy & Administration at the OECD, said that 25–30 more countries are expected to sign the MLI by year-end. Just this morning Mauritius provided its commitment to sign by June 30, Saint-Amans said. OECD officials have been encouraging treaty shopping hubs, such as Mauritius, to sign the document and have threatened negative publicity through the BEPS Inclusive Framework peer review process if they don’t sign.
The MLI introduces into tax treaties BEPS provisions designed to curtail tax treaty shopping, prevent artificial avoidance of permanent establishment status, strengthen mutual agreement procedures for resolving tax treaty disputes, tackle multinational tax avoidance through hybrid mismatches, and provide for mandatory binding arbitration.
Several provisions are mandatory BEPS “minimum standards” which all members of the BEPS Inclusive Framework must adopt, either through the MLI or through other means, while others are recommended best practices, which countries can choose to adopt or not.
Countries’ decisions regarding which tax treaties they will select as MLI covered tax agreements and regarding the options, elections, and reservations they will agree to are provided in PDF format on the OECD website, making it difficult to assess the effect of today’s signing.
Speaking earlier this week in Washington, Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration said that the OECD intends to soon follow up by providing a database allowing easy matching of counterparty responses. The OECD needs time to ensure the accuracy of the matching before publishing the information, though, said Perez-Navarro at a conference sponsored by the OECD, USCIB, and BIAC.
She also said that OECD intends to provide further guidance on the MLI’s provisions on mandatory binding arbitration of tax disputes. This optional provision, favored by many multinationals, was agreed to today by about 25 countries.
Perez-Navarro further noted that the MLI does not contain all the options to satisfy the BEPS tax treaty minimum standards, namely, the detailed limited on benefits provision. This provision will be part of the 2017 update to the OECD model tax treaty, which will be released in draft form this summer, she said.
Notably absent from today’s list of MLI signatories was the United States, which early on said that the MLI did not have much to offer since the US has already met BEPS minimum standards and disagrees with other provisions, such as the strengthened rules for permanent establishments.